An Auckland firm aiming to commercially make biofuel out of the flue gas from factories has been awarded $12 million in Government funding.

LanzaTech - partly backed by The Warehouse founder Stephen Tindall - won the first major contract awarded under the Foundation for Research, Science and Technology's Low Carbon Energy Technologies fund and hopes the new fuel will slash the country's petrol consumption by 90 per cent

"This is one of the most exciting projects of its kind we have invested in, with great potential to reduce our carbon emissions," said foundation chief executive Murray Bain.

It was one of 96 contestable contracts worth $438 million over six years awarded in the foundation's latest funding round.

Included was $50 million for nine University of Auckland research projects on topics as diverse as nutritional epigenomics (or how nutrition in the womb affects development later in life) and an investigation into the mineral wealth of the North Island.

LanzaTech founder Dr Sean Simpson said the three-year contract would allow further development in its biofuels research."

Just as yeast turns sugar into alcohol, LanzaTech uses a bacterium to produce ethanol from carbon monoxide, a waste product of many industrial processes. A pilot plant design is being developed that will allow ethanol production to be demonstrated at scale over the next 12 months.

"We looked essentially for the lowest cost source of carbon that was out there," said Dr Simpson.

"It would look like a brewery next to a steel factory,"Any industry producing carbon monoxide and hydrogen emissions would be suitable for the process.The fuel could be mixed with petrol in a 90 per cent biofuel blend, cutting reliance on traditional fuels

"You quickly realise that waste resources are the lowest cost."

He conceded the idea might sound like science fiction but said it was hoped the fuel would go to market in the next five years.

The funding allowed the research to be broadened to explore alternatives to get around drawbacks of ethanol.